A sharp increase in oil prices, plus tensions in Iran and key airport hubs could long-lasting impact on airlines.
On the 3 January 2020, Qasem Soleimani, Iran’s most powerful army general, was killed in a US drone strike at Baghdad airport. The assassination caused tensions between the two countries to soar, raising fears of future conflict.
Iran vowed “severe revenge” for his death. Meanwhile, President Trump warned that the US would respond “perhaps in a disproportionate manner” to any retaliation from the Iranians.
Apprehension in the Middle East has seen an increase in oil prices, harming airlines
Recent events pose a serious long-term cost problem for the airline industry owing to fuel costs.
Fuel is one of the highest expenses for airlines and higher oil prices result in increased jet fuel and diesel prices. This increase in operating costs is passed on to the consumer, resulting in higher airfares.
Increased airfares will likely see a reduction in the number of passengers choosing to fly each year, which will negatively impact airlines around the world.
It is estimated that half of the world’s recoverable crude oil is located in the Middle East, and although Iran only produced 4% of the world oil in 2018, it sits upon 13% of global oil reserves.
Unsurprisingly, recent tensions in Iran have meant that crude oil prices jumped 3.42% to more than $63 a barrel. Analysts suggest that oil prices could go as high as $80 a barrel, even if a war between the US and Iran doesn’t materialise.
Threat to Western tourists could see tourism suffer greatly in the region
Airport hubs such as the UAE and Turkey are at risk of losing business if tourists stay away. Leading airlines depend on the return trade. If routes to the Middle East fail to attract sufficient passenger numbers, damaging financial losses are likely.
The United Kingdom and the United States both feature in the top ten source markets for Gulf Cooperation Council countries. Increased tensions in Iran will likely reduce the number of western tourists visiting the region.
As events have unfolded, western tourists have been told by the FCO to remain vigilant in countries including the UAE, Turkey and Egypt.
Iranian Professor Seyed Mohammad Marandi said “If I was a Western citizen I would leave the United Arab Emirates immediately. Not only will Iranian leaders retaliate but also Iraqis will retaliate.”
If tensions in the Middle East do not de-escalate quickly, the reduction in tourism will lead to the region suffering an economic downturn in the long-run.